Dear Let's Talk Credit,
I have a credit card balance of $6,500 that I had been making payments
on through a debt management program. I had been six months behind in payments
prior to going on the debt management program. The card company kicked me out of
the program, and I have begun to make monthly payments directly through them. I
have the ability to pay in full a year from now or settle by paying 60 percent
now. Will settling now be better on my credit score a year from now, or waiting
to pay in full? -- Tom

Dear Tom,
Most of the damage to your credit score occurred during
the six months when you were unable to make payments on your credit card. That
negative information will remain on your credit report for seven years from the
first date of delinquency (typically no more than 180 days past due -- it's complicated, see the Federal Trade Commission's 1998 ruling on the topic for more details about start dates for delinquencies). But, the good news is
your credit score will slowly improve as you pay your accounts on time and as
agreed.

Paying off the card over the next year will be
more favorable to your credit score than settling.
However, rather than making the decision based on what's best for your
credit score, I'd rather see you focus on what is best for your overall
finances. For instance, it sounds as if you have approximately $4,000 available
to settle your credit card balance. Instead of settling the account, you might
consider adding the $4,000 to your savings while continuing to pay on the card. It is essential to have savings for
unexpected expenses. This would help ensure
that you won't have to accumulate unplanned credit card debt the next time you
have unexpected expenses.

I'm not sure why the card issuer removed you from
the debt repayment program. If it was
because you did not make payments as agreed, that tells me that you probably
had unexpected expenses that prevented you from making your monthly
payments.

If you don't already have a monthly spending
plan, develop one as soon as possible. Keep
track of all your debt payments and expenses for a month. If your expenses are more than your income,
take a hard look at how you spend your money during the month. You'll need to make the necessary cuts to
bring your expenses in line with your income. And don't forget to add at least
some money to the plan for your savings.

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Published: April 25, 2013

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